A ‘Bull Call Spread’ for ‘High-Probable’ Reversal!

The Nifty IT index remained the second top-performing sectoral index for the day, gaining 1.07% to 27,355.25. While the sector is still a laggard, especially after disappointing Q4 FY23 earnings by Infosys (NS: INFY ), it might be the right time to capitalize on the reversal of Infosys.

It is an IT behemoth with a market capitalization of INR 5,07,762 crores and currently trades at a TTM P/E ratio of 21.07, compared to the sector’s average of 23.26. One of the reasons for a lower P/E is the drastic fall that the stock went through a few days back amid its Q4 FY23 earnings. The stock hit a 10% lower circuit on increased volume but these are the times to accumulate fundamentally strong businesses such as this IT giant.

Image Description: Daily chart of Infosys with volume bars at the bottom

Image Source: Investing.com

Investors looking to add this tech stock to their portfolios can explore the current lucrative levels. After a massive drop, the stock didn’t continue its downtrend and started to trade in a very tight range. This price action indicated a probable increase in demand over supply as the downtrend was instantaneously curbed. Also, on the massive fall day, the stock made a hammer candlestick pattern on the daily chart, a good reversal indication. As long as the low of this hamper pattern is intact, traders can keep exploring long opportunities in this counter.

Today, Infosys shares jumped 1.52% to INR 1,246.25 and closed at the highest level since 19 April 2023 and broke above the tight range. Now the stock would probably look to pare some of the losses as it prepares for a reversal.

Derivatives traders can look at a simple bull call spread in case they are looking to play this trade on the long side. The 1240 ATM CE at INR 37.95 (long) and 1300 OTM CE (short) at INR 12.75 will constitute a bull call spread. The total cost of this strategy will come out to be around INR 25.2 per lot or INR 10,080. This will be the maximum risk in this strategy.

On the upside, if the stock moves only 54 points by the end of the expiry, traders can pocket a good profit of INR 34.8 or 13,920, which will be the maximum profit. This is a low-risk and low-reward strategy for traders with less capital with a good probability of profit.

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